French Experiment Shows Trouble with Tax on HFTs

It all depends where you focus: France has rolled out a transaction tax, but revenues have been lower than expected because it can’t be applied to high-frequency trades, and also because volumes are down.

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PARIS—As the French government discusses with banks whether to recalibrate its position on a European proposal to curb speculative trading with a tax on financial transactions, an experiment on home territory has shown it’s hard to levy much money on elusive trading.

A little over a year ago, in August 2012, France introduced a domestic tax on financial transactions.

The snag: high frequency trading, which uses computer algorithms to trade stocks in fractions of a second, and can add extreme volatility to markets, is not subject to the tax.

The major reason is that Euroclear, the company which settles stock and bond transactions in France, and is responsible for collecting the tax, does not keep track of intraday transactions, which are the mainstay of high frequency traders. If a trader buys a security and sells it within the same day, since there’s no actual transfer of the stock certificate, Euroclear has no record of the transaction happening, and therefore collects no tax.

This also partly explains why the government, which expected to gain €530 million ($722.18 million) from the new tax between August and December 2012, actually collected less than half that amount, or about €199 million. Tax authorities also blame lower trading volumes, which fell by 20% in 2012 on Euronext compared to the previous year, for the decline in tax earnings.

Christian Eckert, a socialist lawmaker, earlier this month proposed an amendment to the 2014 budget bill to extend the tax to intraday transactions. In the next few days, lawmakers in the lower house of parliament will vote on the proposed amendment.

But the amendment is facing fierce opposition from financial institutions, which say that extending the transaction tax would lead to a further decline in trading volumes, and hurt Paris’s financial place. High frequency trading is also essential to ensure market liquidity, say bankers.

But many of the stocks traded by high frequency traders are that of blue chip or large companies, says one group of activists. “Hardly illiquid shares,” says Benoît Lallemand senior policy analyst at Finance Watch, an NGO that conducts research and advocacy on financial regulation.

France, along with Germany, had been one of the driving forces behind a Europe-wide tax on financial transactions. After an initial proposal for such a tax failed to gain the support of all EU countries, 11 states agreed last year to push ahead with the levy. Earlier this year, the European Commission, the European Union’s executive body, made a new proposal for a far-reaching levy on stocks, bonds and derivatives. But support from several member states, including France, has been waning in recent months.

At a time when France is already facing pressure to back watered-down proposals on the financial transaction tax in Europe, the vote will prove a test of the French government’s political will to force the financial sector to make substantial contributions to public finances.